Many industries are struggling in the current climate and, in particular, car sales have been at an all time low. General Motors was the biggest car company in the world, but recently we have seen them becoming the biggest industrial bankruptcy, which will have consequences for many car manufacturers around the world. UK car sales were 25% lower in May 2009 than at the same time last year and Chrysler will sell most of their assets to Fiat when they form a strategic alliance in a bid to help them exit bankruptcy protection.
The troubles of the carmakers have passed up the production chain to automotive suppliers, component manufacturers and engineering firms, and down the chain to the dealerships at a time when consumer confidence has taken a knock. The following articles look at some of the recent developments in the car industry and consider their likely economic impact.
UK new car sales 25% lower in May BBC News (4/6/09)
Creditors cry foul at Chrysler precedent The Wall Street Journal, Ashby Jones, Mike Spector (13/6/09)
The decline and fall of General Motors The Economist (4/6/09)
GM pensioner’s fears for future BBC News (1/6/09)
Opel staff face wait for job news BBC News (2/6/09)
From biggest car maker to biggest bankruptcy BBC News (1/6/09)
GM sales executive lays out company’s direction Chicago Tribune, Bill Vidonic (14/6/09)
Chrysler and Fiat complete deal BBC News (10/6/09)
Fiat gambles on Chrysler turnaround Telegraph, Roland Gribben (1/6/09)
Obama taskforce faces Congress over car industry rescue Times Online, Christine Seib (10/6/09)
Has pledge of assistance revved up the car industry? EDP24, Paul Hill (10/6/09)
Questions
- What is a strategic alliance and how should it help Chrysler?
- What are some of the methods that governments have used to help stimulate the car industry? Consider their advantages and disadvantages.
- Think about the consequences beyond the car industry of the decline of General Motors. Who is likely to suffer? Will there be any winners?
- General Motors was established in 1908. How were they able to expand so quickly and what do you think are the main reasons for their current decline?
- The article in The Economist suggests that, despite the current problems in the car industry and the global recession, selling cars will never really be a problem. What do you think are the reasons for this?
Even in the current gloomy economic climate, there is something else that has grabbed media attention – the outbreak of swine flu. This is of particular concern, given the WHO’s announcement that we are in an H1N1 flu pandemic. The symptoms and health risks have been widely broadcast, but it is not just this that governments are concerned about. The economies of some countries, in particular Mexico, have been suffering. ‘Swine flu has dealt a major blow to Mexico’s already battered economy’. Many countries have issued advice to businesses on dealing with a potential pandemic and some countries are facing trade restrictions. It’s important to consider the economic consequences of this outbreak in a time of global recession. How will some of the worst hit industries cope and what are the costs that firms could face if the situation gets worse? The following articles explore the issues.
Economic impact of swine flu BBC News: World News America (4/5/09)
Advice to businesses on swine flu BBC News (4/5/09)
Swine flu nations make trade pleaBBC News (3/5/09)
WTO protectionism report to feature swine flue bans The Economist (12/6/09)
Mexico economy squeezed by swine flu BBC News (30/4/09)
Swine flu fears hit travel shares BBC News (27/4/09)
Swine flu: Four ETFs to watch Seeking Alpha (12/6/09)
Employers have to pay for swine flu quarantines Scoop Business: Independent News (12/6/09)
Questions
- Which industries are the most affected by the outbreak of swine flu?
- What are some of the costs that businesses will face following the WHO’s announcement that we are in a flu pandemic?
- Some of the articles talk about possible trade restrictions. What are the arguments (a) for (b) against protectionist measures in these circumstances?
- How will this flu pandemic add to the global crisis we are currently facing? What will happen to share prices, to tourism, to people’s expectations?
- Do you think that firms have a social responsibility to deal with this pandemic?
- Will there be additional health costs and who should bear them? What do you think will be the impact on the NHS, given its method of provision and finance?
- Do you think that this pandemic will affect the global economy’s ability to recover from this recession?
The first linked article below is from the American business magazine Forbes. It looks at the economics of football (‘soccer’) signings and, in particular, that of Robinho by Manchester City. In September 2008 the club was bought by an Abu Dhabi investment fund, controlled by Sheikh Mansour bin Zayed Al Nahyan, for £210 million. But does the investment in new players make good business sense?
Also, what should determine whether a club sells a player? The third link below considers this issue. The link is to the Embedding Threshold Concepts (ETC) site at Staffordshire University. ETC was funded by the Higher Education Funding Council for England’s Fund for the Development of Teaching and Learning (FDTL). The site has a number of teaching and learning resources.
City of Dreams Forbes (8/4/09)
Man City beat Chelsea to Robinho BBC Sport (1/9/08)
Selling footballers: the economic viewpoint ETC reflective exercise
Questions
- Was it consistent with the goal of profit maximisation for Manchester City pay Real Madrid £32.5 million for Robinho? Was it consistent with the goal of profit maximisation for Real Madrid to sell him?
- If Real Madrid had decided to keep Robinho, how would you estimate the cost of doing so?
- What difficulties are there in developing Manchester City into a ‘global brand’?
- In what sense are the top Premier League clubs a ‘self-perpetuating oligopoly’?
The recession of the past few months has taken its toll on organic farmers. Until recently, the industry was booming as consumers switched to products perceived as greener, healthier and more ethically produced. Now, as many consumers are feeling the pinch, they are switching to cheaper foodstuffs. The resulting decline in demand for organic food has turned profit into loss for many organic farmers. According to the first of the linked articles below, at least two organic farmers are leaving the movement each week.
But what will happen as the economy recovers and people start turning back to organic products? Given that it takes some two years to convert to organic standards, there could be supply shortages next year.
As UK shoppers tighten their belts, organic farmers feel the squeeze Guardian (11/4/09)
United Kingdom-Organic slowdown Farming UK (12/4/09)
Can the organics survive the current economy? Limerick Post (10/4/09)
Questions
- How close to perfect competition is the market for organic foods?
- What determines whether an organic farmer should continue in the market even though a loss is being made?
- What can you conclude about the income and price elasticities of demand for organic produce and the cross-price elasticity of demand for organic food with eating out?
- What is likely to happen to the market for organic food over the next two years?
Google is a classic example of the new ‘Internet economics’. The main service it provides – search – is completely free and yet it is an enornmously profitable company and growing fast. Much of what they provide in addition to their search service is also free: Google Docs, Google Maps and Google Scholar. So how do they do it? The first link below is an article considering this issue and the second link gives access to an archived version of In Business giving further detail. The programme is well worth listening to. A key part of the explanation for this new phenomenon relates to the low and falling costs of providing these internet services.
Buy none, get one free BBC News Online (8/1/09)
Free for all BBC News Online (8/1/09) In Business – programme archive
Questions
- Write a short paragraph explaining briefly the Google business model.
- Identify two fixed and two variable costs of running an internet search service.
- What are the marginal costs of Google providing additional internet searches?
- Discuss the relationship between costs, revenue and profit for a company like Google as demand for their servces grows.